People’s Pension Updates Climate Approach for £40bn Portfolio

People’s Pension replaces fixed climate targets with flexible assessment framework

People’s Pension has dropped its binding 1.5°C portfolio target. The scheme now uses a case-by-case assessment of climate risks across different markets and sectors. This marks a substantial change in how the UK’s largest commercial master trust approaches climate strategy for its seven million members and £40 billion in assets.

The revised framework moves away from uniform decarbonisation targets. Instead, it evaluates climate considerations based on financial materiality and real-world investment conditions. Consequently, the scheme aims to balance climate action with its fiduciary duty to protect retirement savings.

Dan Mikulskis, chief investment officer at People’s Partnership, described the change as an evolution in industry understanding. The scheme commissioned a comprehensive review from sustainable investment specialists Canbury before updating its approach. Moreover, Mikulskis emphasized that pension trustees must adapt investment strategies as evidence develops.

How the investment framework has changed since 2019

The original 2019 strategy set a portfolio-wide target aligned with 1.5°C warming scenarios. This meant the entire fund aimed to match the emissions trajectory required to limit global temperature rises. However, the new approach abandons this top-down constraint.

People’s Pension now assesses climate targets separately for different asset classes, sectors, and geographic regions. For example, the scheme might set different expectations for European utilities compared to Asian manufacturing companies. This granular methodology reflects variations in policy support, technology readiness, and market conditions across different contexts.

The scheme still maintains its net-zero ambition aligned with the Paris Agreement. Nevertheless, this is no longer treated as a binding portfolio-level requirement. Instead, climate considerations are integrated into portfolio construction based on valuation discipline and investment fundamentals.

This shift recognizes that uniform targets can create unintended consequences. Specifically, they may force divestment from sectors where engagement could drive meaningful change. Furthermore, they can introduce concentration risks by pushing capital into already crowded low-carbon investments.

Why People’s Pension abandoned binding temperature targets

The scheme cited two primary drivers for the overhaul. First, global emissions are not declining in line with 1.5°C pathways. The policy action anticipated when the Paris Agreement was established has not materialized at the expected pace or scale.

Second, the investment case for low-carbon transitions varies dramatically by sector and region. Some industries face clear regulatory pressure and have viable decarbonisation technologies. Others operate in jurisdictions with weak climate policy or lack affordable alternatives to fossil fuels. Therefore, applying identical targets across all holdings became impractical.

People’s Pension warned that maintaining targets disconnected from real-world conditions could harm members. Specifically, such targets might introduce additional investment risk without delivering meaningful climate benefits. The scheme’s fiduciary duty requires it to prioritize long-term financial outcomes for pensioners.

This reasoning reflects broader concerns within the pensions industry. Many schemes worry that overly prescriptive climate targets could conflict with their legal obligation to maximize returns. Additionally, there are questions about whether capital allocation decisions by pension funds can meaningfully influence global emissions trajectories.

Investment strategy now focuses on transition leaders and valuation discipline

The updated framework allows People’s Pension to invest in high-emitting sectors where companies demonstrate credible transition plans. The scheme will seek out what it calls “transition leaders” within carbon-intensive industries. These are businesses with strong fundamentals, reasonable valuations, and realistic decarbonisation strategies.

For instance, the scheme might invest in a steel manufacturer that is adopting hydrogen-based production methods. Similarly, it could hold positions in energy companies that are genuinely shifting their business models toward renewables. The key criterion is whether the investment case stacks up financially while supporting climate progress.

Emissions reductions will primarily come from companies, policymakers, and the broader economy rather than capital allocation alone. People’s Pension acknowledges that pension funds have limited ability to drive decarbonisation through divestment. Instead, real-world emissions fall when governments implement effective policy and when companies develop and deploy cleaner technologies.

Valuation discipline remains central to the approach. The scheme will not pay inflated prices for low-carbon assets simply to meet climate metrics. This protects members from potential bubbles in green investments while ensuring the portfolio remains diversified and resilient.

Stewardship and engagement take priority over divestment

People’s Pension continues to emphasize stewardship as its primary climate tool. The scheme engages with companies on their transition plans, governance structures, and capital allocation decisions. This direct dialogue aims to influence corporate behavior in ways that pure divestment cannot achieve.

The scheme also engages with policymakers to advocate for climate policies that create clear investment frameworks. Effective regulation can reduce uncertainty for businesses and investors alike. Consequently, policy engagement may deliver more impact than portfolio adjustments.

This stewardship-led approach reflects a belief that pension funds can have the greatest influence by using their voice as shareholders. Selling holdings in high-emitting companies simply transfers ownership to investors who may care less about climate issues. By contrast, active ownership allows schemes to push for meaningful operational changes.

However, this strategy requires significant resources and expertise. Effective engagement demands detailed sector knowledge, clear escalation processes, and willingness to vote against management when necessary. Therefore, not all pension schemes may have the capacity to implement similar approaches.

Essential details about the portfolio strategy update

• People’s Pension manages approximately £40 billion in assets for seven million members across the UK.
• The scheme has replaced its binding 1.5°C portfolio target with a flexible, case-by-case assessment framework that varies by sector and region.
• Net-zero ambition aligned with the Paris Agreement remains in place but is no longer treated as a binding portfolio-level constraint.
• The revised approach was developed following a comprehensive review of academic and industry research commissioned from Canbury, a sustainable investment specialist.
• Climate considerations are now integrated based on financial materiality and valuation discipline rather than uniform policy assumptions.
• The scheme will invest in transition leaders within carbon-intensive sectors where fundamentals and valuations support long-term objectives.
• Stewardship and engagement with companies and policymakers remain central to the climate strategy.

What this means for pension scheme climate strategies

The change at People’s Pension reflects growing debate about how pension trustees should balance climate objectives with fiduciary duties. Many schemes face pressure from members, regulators, and advocacy groups to set ambitious climate targets. Meanwhile, they must ensure investment decisions serve the primary purpose of delivering retirement income.

This tension becomes particularly acute when climate targets require investing in ways that might reduce returns or increase portfolio risk. Trustees are legally obligated to act in members’ financial interests. Therefore, they cannot prioritize climate goals if doing so materially harms retirement outcomes.

People’s Pension’s decision may influence other schemes facing similar dilemmas. The move suggests that flexible, evidence-based approaches may better serve both climate and financial objectives than rigid targets. However, it also raises questions about accountability and transparency.

Without binding targets, how do members and regulators assess whether a scheme is genuinely addressing climate risks? Detailed disclosure of investment decisions, engagement activities, and portfolio climate metrics becomes even more important. Furthermore, schemes need robust governance processes to ensure climate considerations are genuinely integrated rather than sidelined.

The approach also acknowledges practical limitations of investor influence. Pension funds can encourage companies to reduce emissions, but they cannot force governments to implement effective climate policy. They can allocate capital to cleaner technologies, but they cannot make those technologies economically viable in all contexts. Recognizing these constraints allows for more realistic expectations about what investment strategies can achieve.

Implications for companies seeking pension fund investment

Companies in carbon-intensive sectors should note that credible transition plans matter more than current emissions levels under this framework. Businesses that can demonstrate realistic decarbonisation strategies alongside strong financial fundamentals may still attract capital from major pension schemes.

However, credibility is essential. Vague commitments without specific milestones, capital allocation, or governance oversight will not suffice. Companies need to show how they will reduce emissions while maintaining or improving their competitive position. This means detailing technology investments, operational changes, and strategic shifts.

Engagement with long-term investors like pension funds also becomes more valuable. Schemes following stewardship-led approaches want dialogue with management about transition plans. Companies that are transparent about challenges and open to investor input may benefit from patient capital even if their current emissions are high.

Conversely, businesses that resist engagement or fail to address material climate risks may face consequences. Stewardship strategies typically include escalation mechanisms such as voting against directors or supporting shareholder resolutions. Therefore, companies cannot assume that avoiding binding targets means avoiding scrutiny.

How sustainability reporting requirements interact with flexible climate strategies

UK pension schemes face increasing regulatory requirements around climate disclosure. The Department for Work and Pensions mandates climate risk reporting for larger schemes. Additionally, the Financial Conduct Authority has introduced sustainability disclosure requirements for asset managers.

These regulations create a framework that exists regardless of individual scheme targets. Consequently, pension funds must still assess, measure, and report climate-related risks even if they do not commit to specific emissions reduction trajectories. The regulatory baseline ensures minimum standards of climate consideration.

People’s Pension will still need to disclose how it integrates climate factors into investment decisions. The scheme must explain its governance processes, risk management approaches, and engagement activities. Therefore, moving away from binding targets does not mean reduced transparency. If anything, it may require more detailed explanation of how climate considerations influence specific investment choices.

This regulatory context is important for understanding the broader implications. Individual schemes have flexibility in how they approach climate strategy. However, they operate within a system that increasingly expects climate risks to be treated as financially material. Our compliance support services for ESG reporting help businesses navigate these evolving regulatory expectations.

Lessons for businesses managing their own climate commitments

People’s Pension’s experience offers insights for companies setting their own climate strategies. First, targets must be grounded in realistic assessment of technological and market conditions. Commitments that ignore practical constraints risk becoming unachievable, which damages credibility.

Second, flexibility can be valuable when operating across diverse contexts. A manufacturing business with facilities in multiple countries may need differentiated approaches that reflect varying energy systems, regulatory frameworks, and supplier capabilities. Uniform global targets may not account for these differences.

Third, engagement and influence matter as much as direct action. Just as pension funds focus on stewardship, businesses can achieve climate progress by working with suppliers, industry bodies, and policymakers. Capital allocation and operational changes are important, but they are not the only levers available.

Finally, financial sustainability must underpin climate action. Businesses cannot serve long-term climate goals if they compromise their financial viability. The challenge is finding the path that delivers both environmental progress and commercial success. This requires careful analysis rather than prescriptive targets that may not fit every situation.

Companies looking to develop robust climate strategies should consider seeking expert guidance. Our net-zero program for carbon reporting and emissions reduction helps UK businesses develop practical approaches that balance ambition with commercial reality.

Where to find authoritative guidance on pension fund climate strategies

The Department for Work and Pensions provides regulatory guidance on climate-related governance and reporting for pension schemes. Their climate change guidance for trustees outlines legal requirements and best practice recommendations.

The Pensions and Lifetime Savings Association publishes resources on responsible investment and climate risk. Their research covers practical implementation challenges facing pension trustees. Similarly, the Pensions Regulator offers guidance on integrating environmental, social, and governance factors into scheme governance.

For businesses interested in how institutional investors approach climate risk, the Institutional Investors Group on Climate Change provides insights into investor expectations and engagement practices. The Transition Plan Taskforce has also published guidance on what constitutes a credible corporate climate transition plan. This framework helps companies understand what investors and other stakeholders expect when assessing decarbonisation strategies.